You are here

The Amazon Model

by P.J. DiNuzzo June 14, 2018

The Amazon Model

Two companies-Amazon and Apple-are in a tight race to become the first company to have a total market value greater than $1 trillion-that is, the value of all their outstanding stock would exceed that enormous figure. Apple is the higher-profile candidate, but the smart money seems to be on Amazon.

Why? When you look at the graph, you can see at a glance that Amazon dominates the e-commerce industry, and you know that the e-commerce industry is ruining the fortunes of traditional retailers like Sears and Toys 'R' Us. But what you may not realize is that much of the Amazon's $1.6 billion first-quarter profit came from activities other than retail sales.

Such as? Amazon Web Services, the company's cloud computing business, far exceeds the 3.7% margins of the retail and Whole Foods operations; it reported a 25.7% operating margin in the first quarter. The company's other revenue includes advertising ($2 billion in the first quarter), which, like Facebook, can directly target consumer preferences using information from purchasing and browsing history.

And then there's Alexa. If you think of Alexa as kind of like Siri on the iPhone, except installed in your house, you aren't seeing the bigger picture. To see the full Alexa vision, drive to a model home in Irvine, CA, where Amazon conducts tours of the future, coming soon to a home near you. The visitors can use the house's Alexa voice assistant to turn on the lights, lower the shades, adjust the thermostat and tell them who is at the front door. They can watch television programs and movies from Amazon's streaming business on its Fire TV device, and listen to music on an Amazon Echo smart speaker. And, of course, they can order virtually anything from the company's core e-commerce website with the push of an Amazon Dash button.

We don't know whether Apple or Amazon will get to $1 trillion first, or if either ever will. But Amazon's path to future profitability involves a lot more than selling books or groceries over the Web.